Engage or Bust! 2015 - Alex Edmans - Does Employee Engagement Improve Firm Performance?
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Professor Alex Edmans, LBSwww.alexedmans.com | @aedmans
based on a TEDx talk, “The Social Responsibility of Business”, http://bit.ly/CSRTEDx
Does Employee Engagement Improve Firm Performance?
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Credit: The M&S Company Archive
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The “100 Best Companies to Work For in America” beat their peers by
2-3%/year over 1984-2009
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“Costco's management is focused on ... employees to the detriment of shareholders. Why would I want to buy a stock like that?”
-- Equity analyst, quoted in BusinessWeek
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Share-holders
Em-ployees
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Share-holders
Em-ployees
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Employee Satisfaction and Firm Value: Traditional View Employees are no different from any other
input. Maximize effort, minimize pay (Taylor (1911))
No need for motivation or retention Satisfaction is a sign of managerial slack Little existing evidence that employee welfare
benefits shareholders Abowd (1989), Gorton and Schmid (2004), Diltz
(1995), Dhrymes (1998), Cronqvist et al. (2007)
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Employee Satisfaction and Firm Value: Modern View Human capital is increasingly important ES is an efficient form of compensation
Human relations theories: money is only an effective motivator up to a point (Maslow (1943), Hertzberg (1959), McGregor (1960))
Unlike perks, job satisfaction cannot be bought with cash
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Employee Satisfaction and Firm Value: Modern View ES is an efficient level of compensation.
“Efficiency wage” argument (Akerlof and Yellen (1986))
Motivation. Piece pay is no longer effective Rational view: satisfied employees work hard to avoid being
fired (Shapiro and Stiglitz (1984)) Sociological view: satisfied employees identify with the firm.
“Gift exchange” model of Akerlof (1982) Retention and recruitment
Intrinsic, not extrinsic incentives
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1888 2015£100 ?
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1888 2015
£100 £18,500,000
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Incentives for the Long Term Level 1 thinking: focus on level of pay
But $10m pay is 0.1% of a $10b firm Level 2 thinking: sensitivity of pay to
performance Fahlenbrach and Stulz (2011): no link between
equity incentives and bank failures Level 3 thinking: horizon of incentives
Edmans, Gabaix, Sadzik, and Sannikov (2012): escrow pay for several years to deter short-termism; vesting should extend beyond retirement
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Edmans, Fang, and Lewellen (2015) Vesting equity linked to
Cuts in investment (R&D, advertising, capital expenditure)
Just meeting earnings targets
[-5,-6) [-4,-5) [-3,-4) [-2,-1) [-1,0) [0,1) [1,2) [2,3) [3,4) [4,5) [5,6)0
100
200
300
400
500
600
700
800
900
T1 T3
Number of cents above forecast
Freq
uenc
y
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Informed Shareholders Basic finance theory teaches the benefits to
diversification; "prudent man rule" in the U.S. But small shareholders have little skin in the game
Bushee (1998): dispersed investors pressure managers to cut R&D to meet short-term earnings targets
Edmans (2009): large shareholders have incentives to analyze a firm's intangibles, rather than reacting exclusively to earnings
E.g. Warren Buffett
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The Side-Effects of Disclosure Increased disclosure seen as a remedy to
corporate scandals (e.g. Sarbanes-Oxley, Regulation Fair Disclosure, Dodd-Frank)
But can only force disclosure of “hard” information, not "soft" such as employee well-being
Edmans, Heinle, and Huang (2015): mandating disclosure of "hard" information will induce firms to focus on "hard" goals at the expense of "soft”
Porsche, Google
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Further Reading TEDx talk on “The Social Responsibility of
Business”: http://bit.ly/CSRTEDx “Does the Stock Market Fully Value
Intangibles? Employee Satisfaction and Equity Prices” (finance-oriented)
http://faculty.london.edu/aedmans/Rowe.pdf Huffington Post summary (non-technical): http://
www.huffingtonpost.com/alex-edmans/there-is-no-tradeoff-between-profit-and-purpose_b_7987934.html
“The Link Between Employee Satisfaction and Firm Value, With Implications for Corporate Social Responsibility" (management-oriented):
http://faculty.london.edu/aedmans/RoweAMP.pdf
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Further Reading (cont’d) Articles in the World Economic Forum
https://agenda.weforum.org/2015/08/how-can-we-help-businesses-think-long-term/
https://agenda.weforum.org/2015/02/why-companies-need-to-think-long-term/
https://agenda.weforum.org/2014/11/how-should-ceos-be-paid/
https://agenda.weforum.org/2015/01/why-happier-workers-matter/